Britain will avoid a much-tipped recession this year and will grow every year until 2027 after a short blip, a massive reversal from economists warning of the longest contraction in a century just a few months ago, the country’s spending watchdog said today.
UK GDP is on course to suffer a mild slump in 2023 of just 0.2 per cent, a big upgrade from the 1.4 per cent downturn forecast by the Office for Budget Responsibility (OBR) in November.
The budget forecasts are much rosier than analysts expected and those published by the Bank of England last month, which claimed the UK could not grow more than one per cent without generating inflation that is above its two per cent.
Despite upgrading their near term outlook for growth, the OBR trimmed its medium-term projections, signalling the UK is poised to repeat its sluggish performance in the years after the financial crisis, slimming Jeremy Hunt’s capacity to launch big tax and spending giveaways at his first budget.
“Over the medium-term, the UK’s fiscal options are constrained by the pressure for more public spending caused by population ageing and the economy’s low underlying growth trend,” Michael Saunders, a former Bank of England rate setter and now senior adviser to consultancy Oxford Economics, said.
OBR’s new economic projections put the UK on path to grow each year after 2023 until 2027
- 2023: -0.2% (vs -1.4%)
- 2024: +1.8% (vs +1.3%)
- 2025: +2.5% (vs +2.6%)
- 2026: +2.1% (vs 2.7%)
- 2027: +1.9% (vs 2.2%)
Richard Hughes, chair of the OBR, warned that the growth outlook could be blown off course by interest rates topping the organisation’s around four per cent assumption, people staying out of the jobs market and lower net migration.
The forecasts are conditioned on “highly volatile” variables, he said at a press conference after Hunt’s budget.
Nonetheless, while the outlook has “brightened somewhat,” a sustained weak underlying economic performance since the financial crisis, amplified by the Covid-19 crisis and Russia’s invasion of Ukraine continues to “weigh on our future growth prospects,” Hughes added.
Hunt said: “We remain vigilant, and will not hesitate to take whatever steps are necessary for economic stability.”
The OBR’s updated forecasts indicate glum predictions on the UK slipping into a long, deep recession in 2023 at the turn of this year now look a bit overblown.
Although the economy is poised to perform better this year and next, families are still set to suffer the tightest squeeze on their living standards on record, with real incomes being eroded six per cent over this year and next by Hunt’s tax rises, higher interest rates and inflation still staying high until the end of the year.
Taxes as a share of the economy – known as the tax burden – is now projected to peak at 37.7 per cent, the highest level since the Second World War and higher than the 37.5 per cent peak the OBR calculated in November.
Figures from the Office for National Statistics out yesterday revealed real pay has dropped 15 months in a row and living standards are around the same level they were after the financial crisis in 2008.
Families are set to receive some relief from inflation declining this year, easing the pressure on their budgets.
The OBR reckons inflation will fall to 2.9 per cent by the end of the year, a big cut from the 3.8 per cent pencilled in back in November.
However, on top of last year’s cost of living squeeze, inflation will still erode workers’ pay for most of 2023.
The near term economic boost, caused by consumer spending holding up better than fears amid the cost of living crisis, will hand the government a short term tax windfall.
In total, Hunt injected an average annual £15bn boost into the economy over the coming years today.
He extended the £2,500 energy bill freeze a further three months to the end of June, costing just under £3bn, and froze fuel duty at a cost of around £5bn.
Hunt also extended the 30 hours a week of government paid for childcare to parents of one and two year olds, costing more than £5bn.
Businesses can now fully offset the cost of certain capital investments against their corporation tax bill for a limited time, soothing the impact of the six percentage point corporation tax hike to 25 per cent from 19 per cent, costing the Treasury a peak of over £10bn a year and about £30bn over the next five years.
Other measures the Chancellor announced included:
- Scrapping the pension lifetime allowance, a peak annual cost of more than £800m
- Boosting research and development tax reliefs, a peak annual cost of more than £800m
- Lifting defence spending by around £3bn a year
While tossing its recession bet in the bin, the OBR’s medium term economic outlook is slightly worse than projected in the autumn.
Coupled with spending around £10bn, it means the Chancellor is meeting his fiscal targets – getting debt as a share of the economy down and capping borrowing at three per cent of GDP in five years – by just £6.5bn, the thinnest margin of any Chancellor since the OBR was created in 2010 and a much thinner margin than the around £9bn calculated in November.
Debt as a share of the economy is on track to rise every year until 2026/27 and then ticks down marginally to 94.6 per cent in the fifth year of the forecast, meaning the OBR thinks Hunt will reach his main target.
The deficit is actually projected to fall in each year of the entire OBR forecast period after this year to just under £50bn by 2027/28.
Much lower debt interest spending caused by the OBR trimming its rate assumptions from more than five per cent to just over four per cent and inflation falling quicker is tipped to ease the pressure on the public finances.
Kitty Ussher, chief economist at the Institute of Directors
“Our economy has been held back in recent years because people running businesses have felt nervous of committing to investment when the climate is so uncertain. The introduction of 100% full expensing for the next three years is therefore very welcome and we urge it to be continued thereafter.”
Michael Saunders, former Bank of England rate setter and now senior adviser to Oxford Economics
“Over the medium-term, the UK’s fiscal options are constrained by the pressure for more public spending caused by population ageing and the economy’s low underlying growth trend. The Budget projects that, over the next five years, the tax burden will rise further with low public spending growth (and cuts in public investment) to ensure the public finances are on a sustainable path. That painful squeeze will weigh on economic activity in coming years.”
Yael Selfin, chief economist at KPMG UK,
“Despite the comprehensive overhaul of capital allowance that replaces the super-deduction, the focus remains too narrow on plant and machinery and continues to exclude investments in intangible assets, which are key productivity drivers of a modern economy.”
Samuel Tombs, chief UK economist at Pantheon Macroeconomics
“The Chancellor remained committed to many policies that will bear down on demand over the next year. Indeed, he has stuck to plans to effectively increase labour taxes in April, by freezing in nominal terms the thresholds for national insurance contributions and the basic and higher rates of income tax.”
Paul Johnson, director of the Institute for Fiscal Studies
“Looking for growth Mr Hunt pulled a whole range of policy levers. Overall these look like a sensible set of changes which could have the sort of marginal, but positive, impact which is perhaps as much as we can expect from measures in a single budget.”